The $100 Oil Debate – OIR 280918

Oil prices are closing out an extremely bullish
week on a high, with U.S. sanctions on Iran and a fear of global supply
shortages sparking a debate over the possibility of $100 Brent.

Friday, September 28th,
2018

WTI and Brent held onto
their gains during early trading on Friday and look set to close out the week
strongly up. The tension between dwindling Iranian supply and the extent to
which Saudi Arabia will increase production is sure to dominate the market narrative
over the next few weeks.

Oil traders almost uniformly
bullish. The mood at the Asia Pacific Petroleum Conference
(APPEC) in Singapore was highly bullish on oil prices in the short-term,
largely because of the supply losses from Iran. Bloomberg also noted that the number of Brent options has surged to its highest ever,
“driven by record call trading, including bets on $100.” Oil traders Mercuria
and Trafigura see global production losses of about 2 million barrels per day
and 1.5 mb/d, respectively, mostly related to Iran.

EU financing vehicle for
Iran probably won’t help oil. The “special purpose
vehicle” to help Iran continue to do business with European companies may not
have much of an impact on the oil trade. Buyers are not likely to be entirely
protected from U.S. secondary sanctions. “I think it is a welcome development,”
Daniel Martin, a partner and sanctions expert at Holman Fenwick Willan in
London, told Bloomberg. “But oil is not the arena it is going to be tested and used first.”

Total SA sees $100
oil. Total
SA (NYSE: TOT) CEO Patrick Pouyanne says $100 oil is
possible but isn’t excited about it. “I’m not sure it’s a good news” he
told Bloomberg. “Even for the oil industry, because you know, when price goes too high
then you open the door to your competitors” while demand will likely decline,
he said.

Saudi Arabia fears
supply glut. OPEC+ decided against further production
gains last weekend, although Saudi Arabia has indicated it would increase production
in September and October. However, Saudi Arabia is also wary about creating a
new supply glut, as the market will see a seasonal dip in demand in the winter.
Riyadh is running the risk of a supply crunch in the fourth quarter, but Saudi
officials fear the opposite problem if they increase production too much.

Texas frac sand
replacing Wisconsin white sand. Shale drillers have
relied on high-quality white sands from Wisconsin for their operations for
several years, but new sand mines in Texas are opening up, pushing out sand
supplies from far away. Hi-Crush
Partners (NYSE: HCLP) announced plans this week to idle an
operation in Wisconsin due to “temporary softness in completions activity and
frac sand demand,” the company said. The decision is a sign that new Texas mining operations are making the
market tough for sand suppliers that are located far away from drilling
operations.

Oman benchmark price
surges. The Oman oil benchmark on the Dubai Mercantile
Exchange spiked this week as speculators bid up the price on fears of supply
outages in Iran. The Oman price gained 11 percent in two days and is now more
expensive than Brent. “It is very unusual to see DME at a premium to ICE Brent,
let alone at such a high level. Given that the vast share of Omani crude is
delivered to China, it is easy to conclude that it is the main driver for this
unusual jump,” JBC Energy said in a note.

Permian pipeline woes
may not be so bad. The pipeline bottleneck may end
sooner than expected as pipelines are being fast tracked, according to a
new report from Raymond James. The backlog should ease by late 2019, and the
discount for WTI in Midland won’t be as wide as feared. The firm downgraded its
estimated discount for Midland WTI to just $15 per barrel relative to Brent,
down from an earlier estimate of $25.

Shell looks at stake in
Gazprom project. Royal Dutch Shell (NYSE: RDS.A) is
reportedly considering buying a stake in a project spearheaded by Russian gas
giant Gazprom. If Shell moves forward, it would be a rare move into Russia,
which has been under western sanctions since 2014. “For Gazprom Neft, it’s a
chance to raise quick money, while for Shell - to get cheap reserves,” a source
told Reuters.

ExxonMobil completes
phase of Beaumont refinery. ExxonMobil (NYSE: XOM) said that it has completed a nearly $500 million expansion of its Beaumont
refinery, which will give it greater capacity to refine light oil from Texas
shale fields. More expansions are on the way, including a plastics production
facility. The Beaumont site could soon become one of the U.S.’ largest
refineries.

SEC sues Elon
Musk. Elon Musk has been sued by the U.S. Securities and Exchange Commission for fraud related
to Musk’s tweet about possibly taking Tesla (NASDAQ: TSLA) private.
The suit could result in Musk being barred from running the company. Tesla’s
share fell more than 4 percent in after-hours trading on Thursday.

New battery could break
lithium dependence. A new battery from NantEnergy, headed by the
California billionaire Patrick Soon-Shiong, operates on only zinc and air, and may even cost less than lithium-ion batteries. The zinc battery
could allow the energy storage industry to move beyond lithium, where
production is concentrated in just a handful of countries and is expected to
struggle to keep up with demand.